The ETF industry's push to attract large asset managers and pension funds could backfire if small investors think they'll get hurt. A $779 million junk-bond trade raises questions.

The $1.2 trillion exchange-traded fund industry is thinking big these days: It wants more institutional investors. Little wonder. A large number of small-time investors already are on board, drawn by low fees, ease of trading and seemingly infinite variety. Asset managers, institutional funds, pensions and endowments might just be getting started, though, as one recent survey says that as few as 14% of institutions use ETFs.

There may be some hidden risks to attracting the rest. Here's one: Should the industry succeed in...